There are so many different kinds of insurance involved with purchasing and owning a home and some are optional and some aren’t. To help to demystify all the insurance types and options, we are launching a four part blog series detailing each type.
We will start with Mortgage Default Insurance
Ever heard the term “CMHC”? Ever wondered what the heck this is for? Well mortgages can be risky business for a bank, especially if the home owner is not investing an awful lot of their own money in the venture. Years ago, if you didn’t have a 20% of the purchase price to put down, you couldn’t get a mortgage as lenders did not want to invest more than 80% in any one home. As house prices rose, a 20% downpayment became more and more unobtainable for the average person. In response to the slowing real estate market, the Canadian Government developed CMHC which is basically an insurance company for banks. If a mortgage applicant has less then 20% of a downpayment OR if the mortgage is risky in other ways such location of the property, type of structure of unusual income sources, the lender will obtain insurance on that mortgage from CMHC. That way, if the applicant should ever default on the mortgage, the lender will be re-reimbursed for the mortgage by the insurance company and the insurance company will look after the foreclosure.
The mortgage applicant pays the premiums for this insurance but the policy actually belongs to the bank and is for the benefit of the bank if there was default on the mortgage. The benefit to the applicant is the ability to be able to obtain a mortgage without a 20% downpayment or in a situation deemed “risky” by the lender or bank.
In these situations, default insurance is NOT optional. You cannot obtain a mortgage in Canada with a loan to value above 80% without mortgage default insurance. Premiums are usually rolled into your mortgage so you pay them along with your monthly mortgage payments, although it is possible to pay them upfront with cash if that is preferred by the client.
Currently there are three mortgage default insurance options in Canada – CMHC (Canadian Mortgage Housing Corporation), Genworth and Canada Guaranty Mortgage Insurance Company. Their premiums are generally very similar but each insurance company varies slightly on the guidelines pertaining to the different mortgage programs they participate in, therefore sometimes one insurer may be more suitable than another in certain situations. Your licenced Mortgage Broker and your lender will select the proper insurer for your particular mortgage when they are arranging your loan.
Contact one of our Mortgage Brokers for further information about Mortgage Default Insurance.
Next Friday’s Feature article will look at the next type insurance involved with obtaining a mortgage – Mortgage Life Insurance